Month by month, expected inflation has dropped — not just for the near-term, but even for as far as ten-years out.

This trend is shown by the chart below (using Cleveland Fed data).

Usually the greatest check on a central bank’s ability to stimulate the economy is the threat of inflation. Yet this threat is consistently perceived to be falling, even from the already puny levels of April. Charts such as that above allow Ben Bernanke to feel disinflation (low, falling inflation) or deflation (falling prices) are a far greater threat than inflation. What these facts mean is that the U.S. federal reserve currently does not need to fear that its stimulus decisions are restricted by inflationary risks at all right now.

Moreover, Meeting Minutes from the June Federal Open Market Committee meeting — the Fed’s main policy-making arm — indicated that some officials openly discussed a new worry: deflation. Those officials believe that inflation — which is running at about half the Fed’s desired range of 1.7 to 2 percent — has been so low that it could turn into a dangerous spiral of falling prices like the one that has plagued Japan since the mid-1990s.

“I would be reluctant to withdraw [stimulus] support too precipitously in the near term,” Mr. Bernanke told the Senate finance committee’s chairman, Senator Christopher J. Dodd, Democrat of Connecticut. “At the same time, to maintain confidence and keep interest rates low, it’s important that we have a strong and credible plan to reduce deficits over the coming years…”AFTER we have moved away from this recession and precipice of depression.

“I think the Federal Reserve does have the capacity, the tools, should deflation occur — to reverse it, and we would be very assiduous in doing that,” Fed Chairman Bernanke added. “I don’t consider that to be a very high risk at this point…” but neither is inflation.

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